Quick baseline (what the IRS may allege)

  • The IRS may claim you omitted foreign wages, interest, dividends, sale gains, or foreign accounts not reported on FBAR (FinCEN Form 114) or FATCA (Form 8938). The agency often has matching data from foreign banks, employers, or information-exchange programs (IRS, Foreign Income; FinCEN, FBAR).

Step-by-step actions to take right away

  1. Read the notice carefully and note the deadline. Notices differ (CP2000, notice of deficiency, collection letters); each has different response rights and deadlines — respond by the date shown to protect your options (IRS, Notices & Letters).
  2. Don’t ignore it. Even honest mistakes can become costly if you miss the deadline.
  3. Gather documentation. Collect foreign pay stubs, employer statements, bank statements, brokerage statements, Form 1099/1099-NEC equivalents, foreign tax returns and any withholding records.
  4. Identify what’s missing. Check whether the omission affects: taxable income, foreign tax credit, FBAR filing thresholds (FinCEN Form 114), or FATCA reporting (Form 8938).
  5. Correct the return if needed. File an amended federal return (Form 1040-X) for the year(s) involved and include necessary schedules; also correct FBARs using FinCEN procedures if accounts were omitted (FinCEN, Report of Foreign Bank and Financial Accounts).
  6. Communicate with the IRS. If you agree with the proposed change, follow the instructions to pay tax, interest, and any assessed penalties. If you disagree, explain why and provide supporting documents.

Common correction pathways and compliance options

  • Amended returns (Form 1040-X): Use when you discover omitted income and you are not under criminal investigation. Include supporting docs and a clear explanation.
  • FBAR (FinCEN Form 114) and Form 8938 (FATCA): File or correct these if foreign accounts or assets were not reported. FBAR is submitted to FinCEN; Form 8938 is attached to your 1040.
  • Streamlined Filing Compliance Procedures: A low-penalty option for taxpayers whose prior failures were non-willful. It can allow you to catch up on late returns and FBARs with reduced penalties (IRS, Streamlined Filing Compliance Procedures).
  • Voluntary disclosure and attorney advice: If willfulness is a risk, consult a tax attorney sooner rather than later. Voluntary disclosure options and criminal-risk assessments should be handled by counsel experienced in international tax and IRS Criminal Investigation practice.

Penalties, interest and statute of limitations (key rules)

  • FBAR penalties: non-willful penalties can apply (commonly up to $10,000 per violation historically); willful FBAR penalties can be severe (the greater of $100,000 or 50% of the account balance) (FinCEN, FBAR guidance).
  • Accuracy-related penalty: typically 20% for underpayment caused by negligence or substantial understatement.
  • Interest accrues on unpaid tax from the due date until paid.
  • Statute of limitations: generally 3 years from filing; if you omitted more than 25% of gross income, the IRS can audit up to 6 years; fraud or failure to file may have no statute limit (IRS, Audits & Statute of Limitations).

How to limit or remove penalties

  • Show reasonable cause. If the omission was due to reasonable cause (illness, reliance on bad advice, or record loss), submit a clear written statement and supporting evidence; the IRS can abate penalties when reasonable cause is demonstrated (IRS, Penalty Relief).
  • First-Time Abatement: In some cases the IRS will grant administrative relief for a first-time penalty.
  • Use Streamlined procedures for non-willful conduct to reduce or eliminate penalties where eligible (IRS, Streamlined Filing Compliance Procedures).

Practical tips from my practice

  • Start with the notice’s deadline. Missing it narrows your options.
  • Keep a running folder of foreign income documents each year — pay stubs, bank statements, and translations when needed.
  • When in doubt, hire a CPA or tax attorney who handles international tax; correcting errors early usually reduces total cost and exposure.

Useful internal resources

What to expect after you respond

  • If you agree and pay or set up payment, the matter typically closes after processing. If you disagree, you may follow appeals channels; if you correct and pay, you’ll usually get a closing letter.
  • If the IRS suspects willfulness, expect a more extensive review and consult counsel immediately.

Final checklist

  • Read the notice and note the deadline.
  • Gather foreign income and account records.
  • Determine reporting errors (income, FBAR, Form 8938) and correct them (1040-X, FinCEN Form 114).
  • Ask for penalty relief if you have reasonable cause; consider Streamlined options if non-willful.
  • Get professional help for willful or complex cases.

Disclaimer
This article is educational and does not constitute tax or legal advice. For a tailored plan, consult a qualified CPA or tax attorney with international tax experience. Author’s note: in my 15 years advising taxpayers, quick documentation and early voluntary correction typically reduce penalties and stop escalation.

Authoritative sources